Calculate the tax for a limited company
If you're a limited company, you don't use the same self assessment tax return system as other businesses. Instead, you pay corporation tax.
Unlike other types of business, you have to calculate the amount of tax you owe yourself.
This process is called 'corporation tax self assessment' - but it uses completely different methods and deadlines to the self assessment used by other types of businesses and self-employed people.
To work out how much tax you owe as a limited company, you fill out a company tax return.
Using an accountant or advisor
Before we start getting into all this, it's well worth pointing out that trying to calculate your tax as a limited company can be very complicated, very challenging and very time-consuming. That's not to say it's not doable without a lot of time and perseverance - just that it's one of those areas where paying for an accountant is usually worth the money.
What you pay tax on as a limited company
The company tax return or your accountant will take you through the following stages, but here's a quick run-down so you know what to expect.
You pay tax on your pre-tax profit, otherwise known as your taxable profits, which is the sum of:
- Income from trading profits (sales) less allowable expenses
- Income from renting out land or property
- Interest on money held on deposit
- Capital gains (selling company assets)
- Most other types of income (if you're unsure, call HMRC or check with a tax advisor)
Having added these, you then take off any relevant deductions, reliefs, losses or allowances.
You then apply the relevant tax rate to calculate your gross corporation tax payable. In the tax year 2008/09, these are:
- 21% for companies with profit up to £300,000 until March 30 2011, falling to 20% from April 1 2011.
- 28% for companies with profit of more than £1.5m until March 30 2011, then 27% from April 1 2011. It will fall by 1% each subsequent year for the four years after that.
- Somewhere between 21% and 28% for companies whose profits are between £300,000 and £1.5m - the tax rate works on a sliding scale. Ask HMRC to calculate the exact figure for your business.
- HMRC offer an up-to-date table of corporation tax rates.
You can then deduct any relevant tax credits, any income tax already deducted from interest income, and any corporation tax you've already paid (if you paid tax early, for example).
How you pay tax as a limited company
The accounting period for limited companies doesn't necessarily coincide with the tax year. It is, instead, your company's own accounting period, beginning and ending with the dates of your financial accounts as you submitted to Companies House.
As a limited company, your deadlines for filing your company tax return and paying what you owe also differ - unlike with other types of business.
- You must pay within nine months of the end of your company's accounting period
- You must file your tax return within 12 months of the end of your company's accounting period
- Where your accountancy period and the tax year don't coincide and the tax rate has changed from one year to the next, you need to apply the earlier tax rate to all pre-tax profit that came in before the tax rate changed, and the later one to all profit that came in after the change. In other words, all profit must be taxed according to the tax rate that applied when it was earned.
- If your company has taxable profits of more than £1.5m, you have to pay corporation tax in instalments.
- The first instalment is due six months and 14 days after the end of the last accounting period - roughly half-way through the accounting period they actually relate to
- You then pay two other instalments with any balance payable within three monhs and 14 days of the end of the accounting period
- So all instalments are due before the deadline to file your company tax return
- If you don't meet deadlines, you may be charged interest or penalties
Doing it online
- At the moment, you can pay and file your company tax return online or on paper
- From April 1 2011 you must pay your corporation tax electronically
- For any accounting period ending after March 31 2010, you must file your company tax return online
Checklist: your tax-paying responsibilities as a limited company
- First off, you're legally obliged to tell HMRC that you're liable for corporation tax. Do this by sending in a form CT41G
- Get an accountant or start going through your corporation tax early on
- Pay corporation tax on any profits that are taxable within nine months of the end of your accounting period
- File a Company Tax Return within 12 months of the end of your accounting period
- If your company is 'dormant' - that is, not trading or active - procedures are different. Contact HMRC if this applies to you.
For a fully comprehensive, insider explanation of all the terms HMRC uses, get it straight from the horse's mouth with its glossary of corporation tax.
What if my accounting period is shorter than 12 months?
Your corporation tax accounting period can be shorter than 12 months - just file one tax return covering that period.
What if it's longer than 12 months?
If your company accounts cover a period longer than 12 months, you have to split it into two corporation tax accounting periods and file two separate company tax returns - one for either period. The first accounting period will cover the first 12 months, the second will cover the rest of the time.
What happens with PAYE and NICs?
As you're a limited company, you have to operate a PAYE system and pay employees' National Insurance contributions (NICs). Find out more by reading these guides on *PAYE* and *NICs*.
How do I get taxed as an individual?
Because you've set up a limited company, you get taxed as an employee of that company - meaning income tax and NI contributions will be deducted from your salary using the PAYE system. If you earn ROI, dividends, benefits or loans from the company more than a certain amount, you may have to complete an income tax return as well - the standard self assessment tax return. But this only applies over certain thresholds. Find out more here.
Do I need to pay tax on profits made outside the UK?
Providing your company is based in the UK, you still have to pay corporation tax on all taxable profits, regardless of what country they were made in.
- HMRC's up-to-date table of corporation tax rates
- The Chartered Institute of Taxation will point you in the direction of a local chartered tax advisor: 0207 235 9381 or www.tax.org.uk
- To contact HMRC for help with corporation tax, you need to find your local tax office. You can do that here.
Smarta Business Builder
To help you on your business journey, we've created Smarta Business Builder, the complete online tools package for growing your business. Website Builder, Business Plans, Accounting Software, Legal Documents and Email - all in one place - from just £20 per month with no contract! Try it out today.